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Commissioner of Income-tax Vs. Karanpura Development Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 84 of 1973
Judge
Reported in(1982)31CTR(Cal)170,[1983]144ITR538(Cal)
ActsIncome Tax Act, 1961 - Section 37(1)
AppellantCommissioner of Income-tax
RespondentKaranpura Development Co. Ltd.
Appellant AdvocateAjit Sengupta and ;Sunil Mukherjee, Advs.
Respondent AdvocateKalyan Roy and ;R.N. Dutt, Advs.
Cases ReferredGranite Supply Association Ltd. v. Kitton
Excerpt:
- .....a permanent advantage to the asses-see-company and ultimately the entire sum was disallowed as a capital expenditure.3. being aggrieved by the said order the assessee went up in appeal before the aac. the aac relying on the decision of this court in the case of cit v. hlndusthan motors ltd. : [1968]68itr301(cal) and discussing the decision of the supreme court in sitalpur sugar works ltd. v. cit : [1963]49itr160(sc) , upheld the decision.4. the assessee went up in further appeal before the appellate tribunal. after discussing certain authorities which have been cited, one or two we shall presently note, the tribunal decided in favour of the assessee. the tribunal found that the shifting of the assessee's laboratory was for efficient working and for better research. on this aspect it.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:

' Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 32,184 incurred in shifting the assessee's laboratory to new premises was a revenue expenditure and was allowable under Section 37(1) of the Income-tax Act,. 1961 '

2. The assessee is the Karanpura Development Co. Ltd. and the relevant assessment year was 1965-66 with the accounting period ending on 31st December, 1964. In the course of assessment proceedings the ITO noticed a claim for allowance of Rs. 32,184 representing the expenditure incurred in shifting the assessee's laboratory from the Chartered Bank Building to the premises of the Lansdowne Jute Mills Co. Ltd. The amount included the expenses for refitting plant and apparatus in the new premises. According to the ITO, the expenditure was incurred for better working of the laboratory and for research and the benefit which was tobe derived from this shifting was of enduring nature (underlined by us). The ITO further held that it created a permanent advantage to the asses-see-company and ultimately the entire sum was disallowed as a capital expenditure.

3. Being aggrieved by the said order the assessee went up in appeal before the AAC. The AAC relying on the decision of this court in the case of CIT v. Hlndusthan Motors Ltd. : [1968]68ITR301(Cal) and discussing the decision of the Supreme Court in Sitalpur Sugar Works Ltd. v. CIT : [1963]49ITR160(SC) , upheld the decision.

4. The assessee went up in further appeal before the Appellate Tribunal. After discussing certain authorities which have been cited, one or two we shall presently note, the Tribunal decided in favour of the assessee. The Tribunal found that the shifting of the assessee's laboratory was for efficient working and for better research. On this aspect it upheld the finding of facts made by the ITO. The Tribunal, however, further held that the assessee did not derive any permanent benefit therefrom. On this aspect the Tribunal was unable to uphold the finding of facts made by the ITO; Ultimately, the Tribunal held in favour of the assessee and allowed the assessee's contention under Section 37(1) of the I.T. Act, 1961. At the instance of the Revenue the question as indicated before has been referred to this court. In support of the rival contentions, parties have cited several authorities. We would discuss some of the decisions to which our attention was drawn. Before we do so, it would be desirable to forewarn ourselves by the observations of the House of Lords in the case of Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1969] 73 ITR 301 (also reported in [1966] AC 295), where Lord Reid observed at p. 318 of the ITR that no one test or principle or rule of thumb was paramount. His Lordship emphasized that the question was ultimately a question of law for the court but this was a question which must be answered in the light of all the circumstances which it was reasonable to take into account and what weight must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle. Lord Upjohn similarly observed at p. 346 as follows :

' Somewhat cynical but true. It is a question of fact and degree and above all judicial common sense in all the circumstances of the case and, while no one regrets it more than I, I do not believe it is possible to lay down any principle when dealing with trading contracts, which would be of any guidance alike to Crown and subject in future cases.'

5. We shall presently note some of the authorities to guide but essentially the question, must be judged having regard to the degree of the expenses involved, the nature of the expenses involved and the benefit and advantage secured by the said expenses judged by judicial common-sense.

6. On behalf of the Revenue reliance was placed on a decision in, the case of Granite Supply Association Ltd. v. Kitton [1905] 5 TC 168. There the Lord President of the Court of Exchequer (Scotland), First Division, noted that in the said case the controversy had been narrowed to four particular items and those four particular items had all got to do with the cost of transferring stones and the re-erection of cranes in the new yard which had become old. Their Lordships felt that supposing these parties had had no crane at all, and in fitting up their new yard had thought it necessary to buy a crane, nobody could say that that was a deduction which would have been allowed. It would not have come under the head of a deduction allowable but would clearly have been struck at under the words of that rule. It seemed to them to make no difference if instead of having to buy a crane completely new they had a crane at the old yard, but at the same time they had a certain expense in order to put that up as a working crane in the new yard and as such it was a capital expenditure. The same opinion was expressed by Lord McLaren. At p. 171, His Lordship observed as follows :

' I think that the cost of transferring plant from one set of premises to another more commodious set of premises is not an expense incurred for the year in which the thing is done, but for the general interests of the business. It is said, no doubt, that this transference does not add to the capital value of the plant, but I think that is not the criterion. There are costs that would not properly be set against the income of the year, and which yet may not add to the capital value. Suppose a person is imprudent enough not to insure his premises or his goods, which can be insured, and they are burned down, and he has to replace the building, he could not be allowed to charge the new building against the income of the year, although the putting of it up does not add to the value of his property, but merely enables it to maintain its original value. I agree, therefore, that the cost of re-erecting the cranes and the cartage of materials, being a thing not done for the benefit of the one year, is not a proper deduction from income.'

7. These observations were approved by the Supreme Court in the case of Sitalpur Sugar Works Ltd. v. CIT : [1963]49ITR160(SC) . There the facts were that the assessee-company had carried on the business of manufacturing sugar in its factory situated originally at Sitalpur. Thatplace suffered from the ravages of floods and good quality sugarcane was not available in sufficient quantities there. With a view to improving its business the assessee shifted the factory to Garaul and in the process of dismantling the building and machinery and transporting and erecting them at Garaul incurred an expenditure of Rs. 3,19,766. In its assessment to income-tax, the assessee claimed that the amount was a permissible deduction under Section 10(2)(xv) of the Indian I.T. Act, 1922, and in the alternative, that depreciation should be allowed on that amount under Section 10(2)(vi) if it were capital expenditure. It was held by the Supreme Court that the expenditure was not incurred for the purpose of carrying on the concern but was incurred in setting up the concern with a greater advantage for the trade than it had in its previous set-up. The expenditure was not incurred in earning profits but was incurred for putting its factory, that is, its capital, in better shape so that it might produce larger profits when worked. The expenditure incurred in dismantling and refitting the existing plant at a better site produced an advantage which enabled the trade to prosper and which could be expected to last for ever and was, therefore, capital expenditure. Reliance was also placed on the observations of Viscount Cave in Athevton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL), 192 that' ...when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital'. In view of the particular facts and circumstances of the case, the Supreme Court felt that the observations in the case of Granite Supply Association Ltd. v. Kitton [1905] 5 TC 168 (C. Exchq.) (Scot), were applicable to this case (49 ITR). On behalf of the assessee it was emphasised that the predominant test should be to find out what was the purpose in incurring the expenditure.

8. Reliance was also placed on the observations of the Calcutta High Court in the case of CIT v. Hindusthan Motors Ltd. : [1968]68ITR301(Cal) . There the location of the factory of a motor car manufacturing company was a little distance away from the main trunk road, but there was an approach road from the main trunk road to the factory premises of the assessee, which road belonged to the Govt. of West Bengal. The said approach road fell into disrepair and began to cause transportation difficulties to the assessee. The Government was not prepared to meet the expenses for the repair of the road. Thereupon, the assessee offered to contribute a sum of Rs. 39,770, namely, the amount necessary for improvement of the said approach road. The assessee paid the said amount tothe Government and claimed the amount as expenditure deductible under Section 10(2){xv) of the Indian I.T. Act, 1922. The ITO treated the expenditure as a capital expense and disallowed the claim for deduction. It was held that the money was spent not so much to bring about any asset or advantage of enduring benefit to itself but to run the business efficiently and conveniently and on the facts of the case the sum spent by the assessee should be treated as wholly and exclusively spent for the assessee's business within the meaning of Section 10(2)(xv) and was an allowable expense under Section 10(2)(xv). The fact that not only the assessee but others also used the road and were benefited was irrelevant. The question was again considered by the Supreme Court in the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT : [1971]82ITR376(SC) . There the assessee, a private company, carrying on the business of manufacture and sale of sugar, paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane producing centres and the sugar factories of the assessee. This expenditure was incurred under a statutory obligation for the development of roads which were originally the property of the Government and remained so even after improvements had been done. There was no finding that the roads were to be altogether newly made or that the assessee would get an enduring benefit from those roads. It was held that the expenditure was not of a capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee's business. The expenditure was incurred for the purpose of facilitating the running of its motor vehicles and other means employed for transportation of sugarcane to its factories and was, therefore, incurred for running the business or working it with a view to producing profits without the assessee gaining any advantage of an enduring benefit to itself. There the Supreme Court after referring to the observations in the case of Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) , at pp. 378 and 379 (of 82 ITR), observed as follows :

'' If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure.' (Vide Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) .

The argument on behalf of the Revenue is that the expenditure which was incurred by the assessee in the present case was intended for bringing into existence an advantage for the enduring benefit of the business. On the other hand it has been maintained on behalf of theassessee that the expenditure was properly attributable to running the business or working it with a view to produce the profits. The Calcutta High Court had occasion to consider an identical question in CIT v. Hindusthan Motors Ltd. : [1968]68ITR301(Cal) . There the location of a factory of a motor car manufacturing company was a little distance away from the main road. The approach road belonged to the Government. It fell into disrepair and began to cause transportation difficulties to the assessee. The Government was not prepared to meet the expenses for the repair of the road. The assessee offered to contribute a certain amount for the improvement. The High Court had no difficulty in coming to the conclusion that the money was spent not so much to bring about any asset or advantage of enduring benefit to itself but it was incurred for its efficient and convenient running and, therefore, it was of revenue nature. This case has been sought to be distinguished on behalf of the Revenue on the ground that the expenditure was incurred only to meet the expenses of the repair and no asset or advantage of an enduring benefit accrued or resulted to the assessee. This distinction does not appear to be sound because in the diverse nature of business operations it is difficult to lay down a test which would apply to all situations. The criteria has to be applied from the business point of view and on a fair appreciation of the whole situation. In the present case, apart from the element of compulsion, the roads which were constructed and developed were not the property of the assessee nor is it the case of the Revenue that the entire cost of development of those roads was defrayed by the assessee. It only made certain contribution for road development between the various cane producing centres and the mills. The apparent object and purpose was to facilitate the running of its motor vehicles or other means employed for transportation of sugarcane to the factory. From the business point of view and on a fair appreciation of the whole situation the assessee considered that the development of the road in question could greatly facilitate the transportation of sugarcane. This was essential for the benefit of its business which was of manufacturing sugar in which the main raw material admittedly consisted of sugarcane. These facts would bring it within the second part of the principle mentioned before, namely, that the expenditure was incurred for running the business or working it with a view to produce the profits without the assessee getting any advantage of an enduring benefit to itself.'

9. The Karnataka High Court had to consider this question in the case of Mysore State Road Transport Corporation v. CIT : [1975]99ITR518(KAR) . It is not necessary to discuss the facts of that case. The decision rested on the facts of the case. But the Karnataka High Court held that the cost of transferring the regional workshop to a new premises was not an item ofexpenditure incurred for the year in which the shifting was done, but in the general interest of the business of the Corporation and resulted in an enduring benefit, to the Corporation and, therefore, was not a proper deduction from income. Simply because the expenditure incurred was for an enduring benefit beyond the year in question, that was not allowable as a revenue expenditure. With great respect, we are unable to accept that should be the criteria. Of course, them the Karnataka High Court had the finding of fact that the expenditure resulted in an enduring benefit to the assessee.

10. This question was again considered by this court in the case of CIT v. Belgachi Tea Co. Ltd : [1975]99ITR99(Cal) . There the assessee, a tea-grower, claimed under ' repairs account ' a sum of Rs. 19,748 as cost of repairs to the fencing of the tea gardens. The ITO was of the view that new fencing was fixed with new pillars and, therefore, a major portion of the expenditure was capital expenditure and disallowed on estimate a sum of Rs. 12,000, On second appeal, the Appellate Tribunal allowed that claim. We held in reference that the assessee's business was to carry on the business of tea-growing and the business could not be carried on unless there were proper fencing. Therefore, incurring of the expenditure was in connection with carrying on of the business by the assessee. If the predominant and main purpose of incurring the expenditure was the carrying on of the business, the incidental advantage of that expenditure, in that the property was secured more and thereby the assessee gained advantage which was of some endurance, could not affect its revenue character.

11. Learned advocate for the assessee tried to urge that where without affecting the profit-earning apparatus some expenditure was incurred in the deployment of that apparatus or in other words, in the process of earning profit, that expenditure should be allowed as a revenue expenditure. Without going into the controversy whether all expenditure incurred in connection with profit earning apparatus would be revenue expenditure, in our opinion, the proper approach should be what was the predominant purpose or intention for incurring the expenditure. If the predominant purpose of incurring the expenditure was the carrying on of the business, the incidental advantage of that expenditure cannot affect its revenue character.

12. Our attention was also drawn to the decision of the Supreme Court in the case of Travaticore-Cochin Chemicals Ltd. v. CIT : [1977]106ITR900(SC) , where the Supreme Court affirming the decision of the High Court, on the facts, held that by having the new road constructed for the improvement of transport facilities the assessee acquired an enduring advantage for its business and the expenditure incurred by the assessee was of a capital nature. The Supreme Court was referred to the decision of the Calcutta High Court in the case of CIT v. Hindusthan Motors : [1968]68ITR301(Cal) , and the decision of the Supreme Court in the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT : [1971]82ITR376(SC) , referred to hereinbefore. But the Supreme Court distinguished these cases on the ground that these decisions were rendered on the facts of those cases. Now, this decision came up for consideration by the Supreme Court in the case of L. H. Sugar Factory & Oil Mills P. Ltd. v. CIT : [1980]125ITR293(SC) , where the Supreme Court held that the sum of Rs. 50,000 contributed under the sugarcane development scheme, was deductible expenditure under Section 10(2)(xv) of the Indian I.T. Act, 1922. The roads under the scheme were undoubtedly advantageous to the business of the assessee as they facilitated the transport of sugarcane to the factory and outflow of manufactured sugar from the factory to the market centres. The construction of those roads, the Supreme Court noted, facilitated the business operations of the assessee and enabled the management and conduct of the assessee's business to be carried on more efficiently and profitably. The Supreme Court noted that it was true that the advantage secured for the business of the assessee was of long duration inasmuch as it would last so long as the roads continued to be in motorable condition, but it was not an advantage in the capital field, because the Supreme Court felt, no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the assessee. The Supreme Court dealt with their previous decisions and also the decision in the case of Travancore-Cochin Chemicals Ltd. : [1977]106ITR900(SC) , referred to hereinbefore, and observed that that decision must be confined to the peculiar facts of that case.

13. The question was also considered by the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) , where at p. 10 of the report, the Supreme Court observed that the decided cases had, from time to time, evolved various tests for distinguishing between capital and revenue expenditure, but no test was paramount or conclusive. There was no all embracing formula which could provide a ready solution to the problem; no touchstone had been devised. The Supreme Court further observed that every case had to be decided on its own facts, keeping in mind, the broad picture of the whole operation in respect of which the expenditure had been incurred. Indeed, several tests were involved. Bearing these tests in mind and in the background of the facts as found by the Tribunal, we are of the opinion that in this case, the Tribunal arrived at the correct conclusion in allowing this expenditure as revenue expenditure.

14. In that view of the matter, the question is answered in the affirmative and in favour of the assessee.In the facts and circumstances of the case, however, parties will pay and bear their own costs.

Suhas Chandra Sen, J.

15. I agree.


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